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Absorption versus Variable Costing

Beeny Hoopers Inc. produces nonfat frozen yogurt. The product is sold in 5 gallon containers, which have the following price and standard variable cost.

Sales price..... $15
Direct Material..... $5
Direct Labor..... $2
Variable overhead..... $3

Budgeted fixed overhead in 20x1, the company's first year of operations, was $300,000. Actual production was 150,000 five gallon containers, of which 125,000 were sold. There were no variances recorded in 20x1. Beeny Hoopers, Inc. incurred the following selling and administrative expenses.

Fixed..... $50,000 for the year
Variable..... $1 per container sold

1. Compute the standard product cost per container of frozen yogurt under (a) variable costing and (b) absorpotion costinng
2. Prepare income statements fpr 20x1 using (a) absorption costing and (b) variable costing
3. Reconcile the income reported under the two methods by listing the two key places where the income statement differ.
4. Reconcile the income reported under the two methods using the shortcut method
5. Build a spreadsheet. Construct an excel spreadsheet to solve all the above requirements. Show how the solution would change if the following information changes: the selling price and direct material cost per unit are $16 and $4.50 respectively

Solution Summary

The solution explains the calculation of unit costs and the preparation of income statment using absorption costing and variable costing

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